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We are long term constructive on the fortunes of Zomato Ltd (ZOMATO). The industry structure is likely to remain a duopoly of Zomato and Swiggy with limited disruptions from the likes of Amazon (unsuccessful global history of last mile delivery) and weaker offering proposition from direct ordering companies like DotPe and Thrive. Coupled with the moats of network effects, branding, last mile delivery, customer user behaviour (convenience and addiction) and wide geographical reach, we believe that the duopoly is likely to dominate in the visible future.

India’s online food delivery market (pre-pandemic) stood at USD 4.2 bn, with an estimated 45-55 mn online food delivery users representing ~9% of the total 700 mn internet subscribers. This user data, when compared with the US (90-120 mn food delivery users, 36% of the internet subscribers) and China (430-470 mn food delivery users, 50% of the internet subscribers) represents a huge latent opportunity. With 1.2 bn smartphone users by FY2030 and having access to globally lowest cost data packs, we forecast online food delivery user numbers to scale to 170-190 mn (14.2- 14.3% CAGR, 14-16% internet penetration). Triggers for this rapid growth are rapid urbanization with increasing nuclear families and busy lifestyle with both husband & wife being part of the working population.

Over the period FY18-21, ZOMATO’s revenues grew at a CAGR of 62.3% to INR 1,994 cr from INR 466 cr (FY18), driven by 54.5% CAGR in FDS to INR 1,716 cr, Hyperpure 2 years CAGR of 266.7% to INR 200 cr and platform services CAGR of 318.5% to INR 78 cr. The FDS metrics of GOV / no. of orders / monthly transaction users improved by 92.3% / 98.4% / 96.2% CAGR to INR 9,483 cr / 23.9 cr / 6.8 mn respectively. Take rates stood at 22.6%, while contribution turned positive in FY21, given the one time jump in AOV to INR 396 (+INR 119).

However, at the EBITDA and PAT level, the company continues to bleed, given the intense competition, discounting and business being in the investment phase. We expect ZOMATO’s revenue to grow at a CAGR of 64.7% to INR 8,910 cr by FY24 from INR 1,994 cr (FY21), driven by 65.1% CAGR in FDS to INR7,722 cr, Hyperpure CAGR of 68.5% to INR 958 cr and platform services CAGR of 43.6% to INR 231 cr. The FDS metrics of GOV / no. of orders / monthly transaction users is expected to improve by 53.0% / 51.4% / 48.8% CAGR to INR 33,981 cr / 82.9 cr / 22.4 mn, respectively.

The normalization of AOV down to INR 370 in FY22 will result in contribution turning negative; however, we expect a sustained positive contribution / EBITDA from FY23 / FY25 respectively given the sharp improvement in AOV to INR 430 in FY25. Take rates are expected to improve (globally take rates are at 30%) while discounting is expected to diminish on the back of improved penetration, onboarding of new cities beyond 525, foray into the adjacent verticals of nutraceuticals & groceries, app ordering convenience and consumer addiction.

ZOMATO is looking to raise INR 9,375 cr (INR 9,000 cr through an IPO and INR 375 cr through OFS). This will improve ZOMATO’s cash levels to INR 15,000 cr, which will serve as currency for M&A (Zomato is looking to acquire a minority stake in Grofers for USD 100 mn), investments in tech & customer acquisitions and general corporate purposes. This cash pile should easily help sustain burn-rates for a good 7-9 years. At the upper price band of INR 76 per share, ZOMATO’s valuation of 5.1X FY24 EV / Sales may appear optically demanding. However, given the

* fledgling nature of the business,

* duopoly market,

* immense upside penetration potential

* humungous untapped online opportunity of the adjacent verticals, and

* scarcity premium

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